The current late payment and repayment interest rates applied to the main taxes and duties that HMRC currently charges and pays interest on are:
Interest rates for all other taxes here.
Details of default surcharge here.
HMRC has issued updated guidance for businesses which need to check whether an entity which stores goods in the UK on its behalf is registered with the Fulfilment House Due Diligence Scheme (FHDDS).
The published list is alphabetical order by company name.
The list should be used if you are a business that is not established in the EU to see if the business that stores your goods in the UK is registered with the FHDDS.
If your business is outsourcing or considering outsourcing its fulfilment operations, then the fulfilment house you are using or intending to use of must be legally accredited by HMRC to do so.
Businesses that must be registered
Businesses are required to be registered if it stores any goods where all of the following apply:
It is illegal to operate outside of the scheme and any fulfilment company found doing so will be prevented operating a fulfilment business and may be subject to a £10,000 penalty and a criminal conviction.
Latest from the courts
In the Regency Factors plc Court Of Appeal (CoA) case the issue was the validity of the appellant’s claim for Bad Debt Relief (BDR) on amounts it had not received after the issue of an invoice.
Technical
BDR is a mechanism which goes some way to protect a business from payment defaulters. Under the normal rules of VAT, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier). The specific relief for unpaid VAT is via the BDR scheme.
A guide to BDR here.
Commentary on the Upper Tribunal (UT) hearing in this case here.
Background
In the CoA case the issue was whether the appellant met the conditions in The VAT General Regulations 1995, Reg 168 for claiming BDR via The VAT Act 1994, section 36.
Regency provided a factoring service to its clients for which it is paid a fee. VAT invoices for those fees were issued to clients when the invoices which are being factored are assigned to Regency for collection.
Regency appealed against a decision of the Upper Tribunal (UT) which dismissed Regency’s appeal against VAT assessments made by HMRC to withdraw BDR which Regency had claimed in its VAT returns.
The UT held that the BDR claim was not valid because
Regency appealed against the decision of the UT on the second point.
Decision
The CoA decided that as Regency’s record keeping was insufficient to support a BDR claim. Specifically, although it did keep the records required by Regulation 168 (2), it did not keep a single VAT BDR account which is required by Regulation 168 (3). The ruling commented that this requirement was a legitimate feature of the scheme as it enables an inspector to check the claim easily. It is not acceptable for a claimant to simply have a pile of unsorted documents which may, or may not, evidence a valid claim.
The court also said that it was possible for HMRC to allow a discretionary claim (clearly, they did not use that discretion in this case) and that the legal requirement was not a barrier to Regency making a proper BDR claim. The appeal was dismissed.
“In short, Regency had the opportunity to prove its claim for bad debt relief in the FTT… but it failed to do so. It is not entitled to a second opportunity”.
Commentary
As always with VAT, accurate record-keeping is essential. As the tax is transaction based, it is vital to keep comprehensive evidence of those transactions and associated payments. Failure to do so may result in:
If Regency had taken “one step further” with its record keeping, BDR would have been paid by HMRC.
Rabbits are zero-rated, even if sold as pets. Sales of pets are standard rated.
Latest from the courts
In the First Tier Tribunal (FTT) case of Errol Willy Salons Ltd (2022) TC 08370 the issue was whether the rent of two rooms were an exempt right over land, or the standard rated supply of facilities.
Background
Room hire is usually exempt from VAT unless it is subject to an option to tax. However, it can be subsumed into a different rated another supply if something more than a “bare” room is provided. In such cases, it would follow the VAT treatment of the composite supply.
The Issue
In the Errol Willy Salons case, HMRC formed the view that what was being supplied was facilities (the room occupation being a minor part of the supply) and therefore subject to VAT. In its opinion the economic and social reality was that the beauticians were provided with a licence to trade from the premises. The appellant occupied the ground floor – operating a hairdressing business. The rooms over the saloon were rented to third party beauticians. The occupants furnished the rooms themselves, provided their own equipment, set their own pricing and opening hours. They did have use of certain services and facilities; a receptionist and toilets, but it was understood that the services were rarely used. Unsurprisingly, the appellant disagreed and contended that the other services were incidental or subsidiary to the exempt supply of the room rental.
The decision
The Tribunal allowed the appeal against the assessment. It found that “non-rent” services provided to the beauticians were limited in nature and not essential to the beauticians’ businesses Consequently, the arrangements amounted to a supply of property (a licence to occupy the rooms) rather than a supply of taxable facilities and was therefore exempt.
Commentary
This is the latest in a long line of issues on composite/separate supplies and room hire/facilities disputes, especially in relation to weddings. It is important to establish precisely what is being provided to establish the correct VAT treatment and advice should be ought if there is any doubt about the VAT liability.
The CIOT has long advocated that it is not the case that every package of supplies involving room hire and other things must be a composite supply of something other than an exempt letting of land.
NB: This case is different to hairdresser chair rentals which remain standard rated.
The new system for the way penalties and interest is charged due to be introduced on 1 April this year has been deferred to 1 January 2023.
The new points-based regime has been delayed to allow HMRC to implement the necessary IT changes.
I wonder if that represents a reasonable excuse for HMRC being late…
Earlier this month, I wrote an article on VAT registration. A query which commonly follows an initial registration query is: can I split my business into separate parts which are all under the VAT registration turnover limit to avoid registering? Prima facie, this seems a straightforward planning point. But is it possible?
You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.
What HMRC will consider to be artificial separation:
HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly, it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:
Separate entities supply registered and unregistered customers
Same equipment/premises used by different entities on a regular basis
Splitting up of what is usually a single supply
Artificially separated businesses which maintain the appearance of a single business
One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations
The meaning of financial, economic, and organisational links
Again, each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:
Financial links
Economic links
Organisational links
HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.
As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.
VAT Inspections
The first point to make is that inspections are usually quite standard and routine and generally there is nothing to worry about. They are hardly enjoyable occasions, but with planning they can be made to go as smoothly as possible. As an inspector in my previous life, I am in a good position to look at the process from “both sides”. If you are concerned that the inspection is not routine (for any reason) please contact us immediately.
Background
Typically, the initial meeting will begin with an interview with the business owner (and/or adviser) to go through the basic facts. The inspector will seek to understand the business and how it operates and will usually assess the answers with specific tests (further tests will be applied to the records). After the interview the inspector(s) will examine the records and will usually have further queries on these. More often than not they will carry out; bank reconciliations, cash reconciliations, mark-up exercises, and often “references” which are the testing of transactions using information obtained from suppliers and customers. There are many other exercises that may be carried out depending on the type of business. Larger businesses have more regular inspections where one part of the business is looked at each meeting. The largest businesses have more or less perpetual inspections (as one would expect). The length of the inspection usually depends on:
The above measurements will also dictate how often a business is inspected.
More details on certain inspections/investigations here
The initial inspection may be followed by subsequent meetings if required, although HMRC state that they aim is to conclude matters at the time of the first meeting.
The inspection – how to prepare
The inspection – during the visit
The inspection – at the end of the visit
The inspector should:
You should:
After the inspection
HMRC will write to you confirming:
On a final point: Never simply assume that the inspector is correct in his/her decision. It always pays to seek advice and challenge the decision where possible. Even if it is clear that an error has been made, mitigation may be possible.
We can provide a pre-inspection review as well as attending inspections if required. It is quite often the case that many HMRC enquiries may be nipped in the bud at the time of the inspection rather than becoming long drawn out sagas. We can also act as negotiator with HMRC and handle disputes on your behalf.
VAT Basics
A business must register for VAT with HMRC if its VAT taxable turnover is more than £90,000 in a 12 month period.
Taxable Turnover
Taxable turnover means the total value of everything that a business sells that is not exempt or outside the scope of VAT.
Registration is mandatory if turnover exceeds the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year – at the end of every month a business is required to calculate income (not profit) over the past year.
A business may also register voluntarily, which may be beneficial if it wants to reclaim input tax it has incurred.
Catches
There are some transactions that must be included in the turnover calculation which can easily be missed:
Timing
A business must register within 30 days of the end of the month when it exceeded the threshold. The effective date of registration (EDR) is the first day of the second month after a business goes over the threshold.
Future test
A business must mandatorily register for VAT if it expects its VAT taxable turnover to be more than £90,000 in the next 30-day period. This may be because of a new contract or a other known factors.
Registration exception
If a business has a one-off increase in income it can apply for a registration ‘exception’. If its taxable turnover goes over the threshold temporarily it can write to HMRC with evidence showing why the taxable turnover will not exceed the deregistration threshold (currently £88,000 in the next 12 months). HMRC will consider an exception and write confirming if a business will receive one. If not, HMRC will compulsory register the business for VAT.
Transfer of a going concern (TOGC)
If a VAT-registered ongoing business is purchased the buyer must register for VAT from the purchase date. It cannot wait until its turnover exceeds the threshold.
Businesses outside the UK
If a business belongs outside the UK, there is a zero threshold. It must register as soon as it supplies any goods and services to the UK (or if it expects to in the next 30 days).
Late registration
If a business registers late, it must pay the VAT due from when it should have registered (the EDR). Further, it will receive a penalty depending on how much it owes and how late the registration is. The rates based on the VAT due are:
How to register
A business can register online. By doing this it will register for VAT and create a VAT online account via which it will submit VAT returns.
Between application and receiving a VAT number
During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the invoices showing the VAT.
Purchases made before registration
There are time limits for backdating claims for input tax incurred before registration. These are:
Once registered
A business’ VAT responsibilities. From the EDR a business must:
VAT groups
VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration). There are pros and cons of grouping set out here.
Buying a coffin is standard-rated but hiring a hearse is VAT free.